Sustainable Investing

How to invest into a multi-trillion megatrend

The global economy is undergoing a profound transformation. From governments to boardrooms, supply chains, industries and energy sources are being rethought and reshaped in fundamental ways.

These seismic changes are being driven by geopolitical and energy security concerns, changing weather patterns, consumer demand, and—more recently—grid constraints stemming from AI’s insatiable demand for power. The movement is picking up in size and speed, and we expect it to accelerate further, providing a compelling opportunity to invest ahead of the curve.

Supported by regulation and driven by private capital, investments into the transition have driven down costs, increasing adoption and bringing the opportunity to a turning point. While investments in this space have, until recently, consisted almost exclusively of early-stage funding of revolutionary technologies, enabling software and infrastructure, that’s no longer true today. In recent years, the investment opportunity has expanded to require later-stage capital, where market players are looking to scale up operations to meet market demand.

What has brought us to this inflection?

An estimated $5 trillion in capital will need to be spent annually through 2050 in order to meet global decarbonization targets1

We believe now is the time to consider investing in the transition, especially in the private markets, for the following reasons:

  1. Public policy: The Paris Agreement of 2015 provided a general framework for governments to reduce emissions to hit aggressive global net zero targets. Today, net zero pledges cover 92% of the world’s GDP, and companies connected to this energy transition are supported by more market participants and stronger infrastructure.
  2. Private sector support: This shift in public policy was mirrored by a momentous evolution in corporate behavior, a change spurred by new consumer preferences and the need for more efficient and reliable energy sources. Nearly 1,000 corporations have adopted net zero pledges since 2018,2 and two-thirds of Fortune 500 companies now have climate commitments. We view this increased private sector support as critical to fostering investment flows and enhancing the feasibility of the investment opportunity.
  3. Declining cost curves: Over the last decade, the cost of photovoltaic (PV) solar power3 has declined nearly 90%, making it cost competitive with, and even in some cases cheaper than, the cheapest fossil fuel alternative even absent subsidies.4 The cost of electric vehicle batteries has also dropped by about 90%, while the cost of onshore wind has dropped by approximately 70%.5 These declining cost curves are key components of the investment thesis, as they lead to mass adoption—enhancing the profitability of decarbonization technologies.
  4. The need for energy security and resilient supply chains: Geopolitical tensions and increasing global conflict have made governments ever more aware of the security of their energy sources and supplies. This has prompted a re-examination of supply chains for fossil fuels and other critical materials, spurring a wave of innovation focused on identifying and developing technologies that will increase efficiencies, reduce dependency on single suppliers or geographies, and diversify sources5.

The opportunities we’re paying attention to

This opportunity set spans multiple industries, geographies and sectors, and it is important to note that many of the opportunities include long-term capital commitments and loss of tangible liquidity, as well as operational and technological risks that investors should consider before making an investment. In an effort to understand the breadth and scope of the opportunity set, we believe it is helpful to delineate its key segments and their relative stages of maturity.

  1. Electrification and renewable power generation: The most mature decarbonization sector, this segment includes everything that can be electrified, including renewable power generation, the evolution of the grid and transportation. Investment opportunities in this space can partially be accessed through public markets, as well as private markets in infrastructure, buyout and growth. Emerging technology solutions, such as AI-driven energy management systems and services, are unique to the buyout, growth and venture segments, and offer substantial return potential above public markets and infrastructure.
  2. Alternative fuels and materials: This segment includes the replacement of fossil fuels and materials with alternative, cleaner options. While this is a newer investment space, it is a key piece of the transition that includes biofuels,6 drop-in fuels,7 hydrogen and green materials.8 These technologies are gaining traction, and present significant investment opportunities as they move towards commercialization. Today, they are primarily available through private market investments in buyout, growth and venture funds.
  3. Carbon markets and carbon removal: For anything that cannot be decarbonized, experts agree that market-based solutions and carbon removal technologies will be needed. These will include carbon markets and carbon capture, storage and sequestration technologies. This segment features a mix of older technologies with more moderate return profiles, which can be accessed through timber investments and through investments in more traditional segments of the energy sector, as well as emerging technologies within the venture segments that offer the potential for long-term significant investment returns. It also includes carbon markets, which are experiencing renewed growth and investment interest as companies and consumers look for reliable and transparent solutions for hard-to-abate and unavoidable emissions. 

The different stages of maturity of these sub-sectors have two major implications for investors looking to access the theme.

First, this is currently a primarily private markets opportunity. An investor seeking access in public markets will find a limited set of options, mostly concentrated in the renewable energy, electric vehicle (“EV”) and battery sectors. These represent only a portion of both the financial return and investment opportunity. Investors will hear echoes of tech investing in the early 1990s, when the companies that went on to define the market were at the beginning of their ascents but not yet accessible through the stock market.

Secondly, as noted earlier, most private market investments in these areas have been concentrated earlier in the capital stack. This has allowed winning business models to grow into companies that are now ready to scale and meet the market opportunity. However, the funding needed to support their growth has not yet emerged at the scale needed. This has given rise to the rather pessimistic terms of the “Missing Middle” or the “Valley of Death.” We prefer to view it more pragmatically—a “Mountain of Opportunity”—and as a potential source of significant returns for investors who have the ability to allocate capital strategically.

We can help

At J.P. Morgan, we aim to deliver ideas and insights that help our clients navigate and invest in the future. If you have questions about investing in the ongoing revolution in the green economy, contact your J.P. Morgan team.

1 BloombergNef, “Energy Transition Investments Trends 2024.”

2 https://zerotracker.net/

 3 Photovoltaic cells convert sunlight into energy, and they are a vital component of solar power generation systems.

4 McKinsey, International Renewable Energy Agency (IRENA).

5 (IAE, economist).

6 Fuels made from biological sources, meaning plant or animal material.

7 Aircraft fuels that are produced sustainably, and because they are chemically similar enough to jet fuel, they can be “dropped in” to existing fuel systems without major changes.

8 Materials sourced or produced sustainably, especially for use in building construction, renovations, and infrastructure projects.

The global economy is evolving. The energy grid and supply chains are being reimagined. We see spending on these developments growing rapidly—along with opportunities to invest in them

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Important Information

Private Equity is typically composed of Venture Capital, Leveraged Buyouts, Distressed Investments and Mezzanine Financing, which are all generally considered to be high risk, illiquid investments designed to deliver larger expected returns than publicly traded securities as compensation for their greater risk. As a result, investing in Private Equity is not suitable for all investors.​

Sustainable investing (“SI”) and investment approaches that incorporate environmental social and governance (“ESG”) objectives may include additional risks. SI strategies, including ESG separately managed accounts (“SMAs”), mutual funds and exchange traded funds (“ETFs”), may limit the types and number of investment opportunities and, as a result, could underperform other strategies that do not have an ESG or sustainable focus. Certain strategies focused on particular sectors may be more concentrated in particular industries that share common factors and can be subject to similar business risks and regulatory burdens. Investing on the basis of sustainability/ESG criteria can involve qualitative and subjective analysis and there can be no assurance that the methodology utilized, or determinations made, by the investment manager will align with the beliefs or values of the investor. Investment managers can have different approaches to ESG or sustainable investing and can offer strategies that differ from the strategies offered by other investment managers with respect to the same theme or topic. ESG or sustainable investing is not a uniformly defined concept and scores or ratings may vary across data providers that use similar or different screens based on their process for evaluating ESG characteristics. Additionally, when evaluating investments, an investment manager is dependent upon information and data that may be incomplete, inaccurate or unavailable, which could cause the manager to incorrectly assess an investment’s ESG/ SI performance.

The evolving nature of sustainable finance regulations and the development of jurisdiction-specific legislation setting out the regulatory criteria for a “sustainable investment” or “ESG” investment mean that there is likely to be a degree of divergence as to the regulatory meaning of such terms. This is already the case in the European Union where, for example, under the Sustainable Finance Disclosure Regulation (EU) (2019/2088) (“SFDR”) certain criteria must be satisfied in order for a product to be classified as a “sustainable investment”. Unless otherwise specified, any references to “sustainable investing” or “ESG” in this material are intended as references to our internally developed criteria only and not to any jurisdiction-specific regulatory definition.

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